Rhode Island sues Curt Schilling, 38 Studios to recoup losses

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Former Boston Red Sox pitcher Curt Schilling, center, left the Rhode Island Economic Development Corporation headquarters in Providence after a meeting in May.

By Michael B. Farrell
Globe Staff
November 01, 2012

Rhode Island on Thursday sued Curt Schilling over his bankrupt company, 38 Studios LLC, seeking to recover some of the $75 million in loans it guaranteed to lure the firm from Massachusetts and alleging that the former Boston Red Sox pitcher and associates manipulated the state to secure the financing.

In a detailed, 97-page complaint filed in Rhode Island Superior Court, the state alleges a broad conspiracy in which Schilling and 13 other defendants engaged in financial misconduct, neglect, and fraud to deceive officials about the company’s financial prospects.

The suit, which seeks unspecified damages, claims that several former 38 Studios executives, investment banks Wells Fargo Securities and Barclays Capital, and Keith Stokes, former head of the Rhode Island Economic Development Corporation, misled the development agency’s board and broke the law to secure funding for 38 Studios.

The suit also claims that “38 ­Studios knowingly received income from a racketeering activity” and invested that money in the company.

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Schilling could not be reached for comment. His lawyer, Stokes, and the other defendants did not return calls for comment.

Stokes, one of the chief architects of the 38 Studios deal, was ­appointed by Rhode Island’s then-governor, Donald Carcieri, in 2010 and ran the Economic Development Corporation until he resigned in May amid controversy around the company’s collapse. The agency’s former deputy director, J. Michael Saul, its lawyers, and advisers are also named in the complaint.

Carcieri, who advocated bringing Shilling and his company to Rhode Island, was not named. He could not be reached for comment.

“Defendants knew or should have known, but failed to inform the EDC board, that 38 Studios was destined to fail ­according to 38 Studios’ own ­financial projections,” the state charges. “In fact, 38 Studios failed because of risks that had not been disclosed to the EDC board.”

Schilling moved his company from Maynard to Providence last year. 38 Studios released one video game and was developing another, dubbed Project Copernicus, but burned through its cash before it could generate significant sales. After failing to win additional financial support from Rhode Island, the company laid off about 400 employees in Providence and Maryland and filed for bankruptcy protection.

As part of ongoing bankruptcy proceedings, auctions held last month at both locations to sell off computers, furniture, video game memorabilia, and studio equipment raised a total of $830,000.

Intellectual property that went into making Project ­Copernicus is expected to be auctioned off in coming months. The company owes as much as $150 million to dozens of creditors.

The Economic Development Corporation’s lawsuit follows a unanimous decision by its board to take legal action against 38 ­Studios executives and key players in the deal.

“The Board’s legal action was taken to rectify a grave injustice put upon the people of Rhode Island,” said Rhode ­Island Governor Lincoln Chafee in a videotaped statement posted on YouTube on Thursday. “The filing of this complaint is only the beginning.”

Chafee’s office declined to comment further.

It is not unusual for a creditor the size of Rhode Island to take legal action against individuals connected to a bankrupt company to offset its losses, said Matthew Martel, a Boston trial lawyer who specializes in bankruptcy litigation at the law firm of McDermott Will & Emery.

“What’s a little surprising is not that there was a lawsuit that was brought, but the ­extremes to which the state of Rhode Island has gone to assert a vast number of claims against a wide array of defendants,” he said. “The state has put together a complaint that alleges a widespread conspiracy.”

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